Housing Slide Brings Panic, Not Level Heads

The fallout from Tuesday’s announcement that housing values have reached a new low has been, well, fast and furious. Home values are still declining sharply, and the 20-city report confirms that the housing market is indeed in a double-dip recession. The Dow was expected to grow cautious on the news, but the 280 point single-day drop indicated more fear for the broader economy than most anticipated. Bank and financial stocks got hammered even worse.

You might think that the sobering news would bring a level-headed response and a call for responsibility and a change of course. Instead our Congressional do-gooders are appealing to federal regulators to forget about a plan to restore discipline and reason in the mortgage market and keep drugging the moribund patient with more steroids and and a morphine drip.

Reuters is reporting that nearly 40% of the members of the House of Representatives believe that the safe mortgage regulations of the recent Wall Street reform law needs to be watered down or the economic recovery will fail. The lawmakers want to allow Wall Street to package riskier loans into securities without reporting any risk on their books. Currently the law requires a 20 percent down payment for a mortgage to be packaged as the safest security (a QRM, or qualified residential mortgage) with no requirement to report risk. I seem to recall that it was the slicing and dicing of subprime loans into securities that were stamped with a Triple-A rating that helped get us into this mess in the first place.

Perhaps it’s time to re-think the Clinton-era deregulation that let investment bankers crawl into bed with commercial banks. The commercial banks are your neighborhood institutions with the conservative, fatherly, middle-aged men in bow ties and tweed suits from J.C. Penney who like to avoid risk and run a tight ship. Investment bankers are the young Turk Wall Street sharks in Armani suits who drive Jaguars and sporty Beemers and would sell their grandmother to make a buck. They took our most sacred investments – our family homes – placed them on the Wall Street craps table, churned and turned mortgages to earn high upfront fees, and then sucked all the cash out of them. Sure; maybe they can fix the housing problem.

Just as living on borrowed money eventually becomes unsustainable, the well-intentioned zeal to ease the pain of a housing crisis can’t go on forever and can only end badly.